Saturday, May 7, 2011

The Remainder

The main reason why fewer men are working is that sweeping structural changes in rich economies have reduced the demand for all less-skilled workers.
"Decline of the working man" The Economist 30 April, 2011.
These structural changes are, I think, unlikely to go away anytime soon. In part, I suspect,because we're reaching a saturation point brought on by increasing productivity. (Now, for the record, I'm not an economist, so I have to base at least some of this on random guesswork.) The basic idea is this - imagine that someone rolled up to your home with a semi-trailer full of random stuff - goods and/or services that you don't already have or make use of. Could you see yourself buying all of the stuff in that trailer, under the assumption that whatever it is, it would improve your life enough to be worth however much it costs to make? Or to put it another way - is the supposed supply-side economic mantra that "supply creates its own demand" true for you?

Here's my theory - Let me pose a hypothetical worker, Alice. Alice is in a situation where she is basically alone in a factory that can make any and everything she needs or wants. Effectively she produces all of her own goods and services (a.k.a.: stuff). I suspect that as Alice's productivity rises, she will eventually get to a point where rather than work the same amount and have more stuff, Alice will start taking more leisure time, and allow her output of stuff to remain constant. In other words, Alice has a demand ceiling, where the value of work drops to less than the value of leisure.

But the way business is structured, it's almost always more efficient to use fewer people, working full time, than to give all workers more leisure time, because each worker tends to carry certain fixed costs.

And the combination of these two factors can lead to a situation where you have, basically, excess workers in the workforce. If you image that you have ten people, each of whom reaches their demand ceiling at 32 hours a week of work, the most effective way to structure production as a business is for 8 people to work 40 hours each. So... what happens to the other 2 workers? They become a structural unemployment problem. Now, in older agrarian societies it was something less of an issue - the 2 "leftover" workers could retreat to a farm and support themselves, applying their own labor to the task of meeting their needs. But in more modern societies, that's not always an option - farming requires skills, land and so on, that not everyone has access to.

And this is where I suspect that part of our current economic trouble comes from. We're at a point where between productivity and trade, we've hit sort of a demand ceiling (which might also be exacerbated by wealth inequality - those people who want to have more stuff don't have the money to justify the costs of producing it). That pushes lower skilled people (who are also generally considered to have lower productivity) into an area where there is no demand for their labor, and an incentive to shed the overhead costs that come with employing them.

Like I said, I'm not an economist, so while this all makes perfect sense to me, it could very well have more holes in it than a Swiss cheese factory. So I'd like to actually run it by someone who knows what they are talking about. I wouldn't be surprised to find that it's at least barking up the right tree.

1 comment:

Keifus said...

Goddammit. Wrote a long reply that got eaten. I also like thinking about how we change from the current situation to the hypothetical one where productivity goes to infinity. 10 hour work week with 8 weeks of vacation sounds like a society that's hit an apogee to me.

I think you're right about some things being demand-limited (who needs a 3-D TV really?). Other stuff (energy, local food), less so. Still other stuff (housing, medical care) is more accurately manipulated by various means, and supply and demand might not be the best description.

It's fun to look at a closed economy, all the valuable stuff that's produced is redistributed among the entire group of people, who (collectively, on average) went through the effort to make it. It doesn't have to be passed around according to the effort or brains it took to make it, and historically it probably almost never has been, no matter the rules that have ostensibly been imposed. In principle, a system of rules could be devised which optimizes the equitability of distribution and/or optimizes the gross value, but frankly I think none of the existing ones model human behavior anywhere near well enough, or model fundamental physical constraints well enough either, for that matter.

A couple other notes on the system we're soaking in:

- J. Random Executive is productive supervising workers in almost the same way that Alice is supervising machines. How come he's indispensible demanding mega compensation, and she's a drain on the bottom line, outsourced at the first chance? Similarly, how productive is management really, compared to people who actually make or invent stuff? How productive is your average day trader whose suit is worth more than my car?

- And it's not just unemployment, it's how the benefits of productivity haven't really gone to the wage-earners at all. Big profits, but static pay have been one story of the past 30 years.

- Capitalism leaves little room for steady delivery and slow change. It's a matter of fast growth and shedding costs (and priveleges for those in a position to cheat), not of serving a niche, and changing only as demand does (yeah, creative destruction, yadda yadda, let's ask AIG how that works in practice). Seems a fundamental flaw both in the system and its underlying description.